Ireland: Economy continues to slow in Q4 2018
National accounts data published by the Central Statistics Office on 14 March showed that the economy slowed markedly for the second consecutive quarter in Q4 2018. The economy grew 0.1% over the previous quarter, following Q3’s 0.9% quarter-on-quarter expansion. Growth also weakened year-on-year in the quarter, sliding to 3.0% from 5.4% in the third quarter. Nevertheless, Ireland was once again the Eurozone’s fastest-growing economy in 2018—for the fifth year running—with full-year GDP growth at 6.7% (2017: +7.2%). The figures, however, are distorted by the significant presence of large multinationals in the country, and the consequent volatility from one quarter to the next makes it difficult to gauge the true health of the Irish economy.
The fourth quarter’s downturn was due to a deterioration in domestic demand dynamics. Fears of a disorderly Brexit have weighed heavily on consumer confidence and business sentiment, translating into a slowdown in domestic demand (Q4: +4.1% quarter-on-quarter; Q3: +6.4% qoq). Private consumption growth fell to 0.5% in the final quarter, down from 0.9% in third quarter, as households sharply downgraded their outlook on the economy. Meanwhile, fixed investment growth tumbled to 10.1% in Q4 from 25.2% in Q3, as businesses cut back on capital investments and delayed investment decisions. In particular, a contraction in building and construction, coupled with a notable deceleration in machinery and equipment, led the decline. Government spending also grew at a considerably softer pace in the quarter (Q4: +0.4% qoq; Q3: +1.8% qoq).
Looking at the external sector, the picture was more upbeat. Although the Eurozone was in the grips of another broad-based downturn, Irish export growth climbed to 5.3% in Q4 from 1.3% in Q3. Meanwhile, import growth moderated to 9.0% from the third quarter’s 10.6%. The external sector therefore dragged less on growth in the quarter compared to the previous one.
Modified domestic demand—the national account metric developed by the CSO that strips out the more volatile components such as research and development, and aircraft leasing operations—rose 0.5% over the previous period in the fourth quarter, contrasting a 0.8% quarter-on-quarter contraction in the third quarter. The upturn thus indicates a firming in domestic activity to some extent, marking a discrepancy with the GDP headline in this case.
Looking ahead, the Irish economy is set to lose considerable speed this year, underpinned by a deceleration in exports amid a more challenging global terrain. Given the economy is highly integrated with the UK’s, the prospect of a no-deal Brexit continues to pose the biggest threat to the outlook, with the Irish border still the main sticking point.
Commenting on the latest GDP print, Daniel McLaughlin, Director of DanMcLaughlin Economics, stated:
“Irish GDP grew by 6.7% in 2018 but that in large part reflected a strong carry-over from 2017 as the economy slowed through the year, coming to a virtual standstill in the final quarter, with growth of just 0.1%.Domestic spending was impacted by Brexit uncertainty and that has carried into 2019 judging by the high frequency data on car sales, consumer confidence and mortgage approvals. That uncertainty may dissipate but the economy may now be facing supply constraints, notably in the labour market; employment growth has slowed and the unemployment rate has remained in a 5-6%-5.7% range for over six months.”